Q2 2022 Regal Rexnord Corp Earnings Call
Good morning, and welcome to the Regal Rexnord 2022 second quarter earnings Conference call.
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I would now like to turn the conference over to VP of Investor Relations, Rob Barry. Please go ahead.
Great. Thank you operator, and good morning, and welcome to Regal Rexnord second quarter 2022 earnings Conference call. Joining me today are Louis Pinkham, our Chief Executive Officer, and Rob <unk>, Our Vice President and Chief Financial Officer before turning the call over to Louis I would like to remind you that the statements made in this conference call that are not historical.
Oh in nature are forward looking statements forward looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward looking statements for a list of factors that could cause actual results to differ materially from projected results. Please refer to today's earning.
This release and our SEC filings.
On slide three we state that we are presenting certain non-GAAP financial measures. In this presentation. We believe that these are useful financial measures to provide you with additional insight into our operating performance and for helping investors understand and compare our operating results across accounting periods and in the same manner as management. Please read.
This slide for information regarding these non-GAAP financial measures and please see the appendix for reconciliations of these measures to the most comparable measures in accordance with GAAP.
Turning to slide four let me briefly review the agenda for today's call Lewis will lead off with his opening comments, Rob Ray Heart will then provide our second quarter financial results in more detail and discuss updates to our 2022 guidance. We'll then move to Q&A after which Louis will have some closing remarks and with that.
I'll turn the call over to Lewis.
Great. Thanks, Rob and good morning, everyone. Thanks for joining us to discuss our second quarter earnings and to get an update on our business and thank you for your interest in Regal Rexnord.
I am proud to report that despite a host of challenges related to various forms of inflation and the global supply chain.
Our Regal Rexnord team remained focused on factors under their control, resulting in strong second quarter performance plus continued progress on many of our strategic growth and margin enhancement initiatives.
The team's disciplined thinking and actions are apparent in our record results this quarter, which include 12% organic topline growth.
280 basis.
Points of gross margin expansion and 230 basis points of EBITDA margin expansion.
These margin gains were enabled in part by continuing to achieve a positive price cost position.
The results put us firmly on track to meet our earnings guidance commitment for the year, which by the way we have revised modestly higher.
Also contributing to the strong performance in a meaningful way or our M&A synergies that continued to track favorably.
And on our current trajectory suggests material upside versus our original target on revenue and margin.
This is a topic that we will discuss in greater detail at our September 13 Investor day.
The quarter also continued evidence clearly identifiable share gains supported by our digital investments new products and competitive service levels.
Regal Rexnord is winning in the market are result of the team's hard work and the many changes we have made in how we run this business.
And on these fronts there is much more to come.
For this strong execution pursued with a sense of urgency as well as continued adherence to our Regal rexnord values I want to say a sincere. Thank you to our approximately 29000 Regal rexnord associates around the world.
One highlight of the quarter I'm, especially pleased with the significant further progress we made improving our margins, particularly in our industrial systems segment.
Key drivers here include the team's persistent adherence to 80 20 principles and the deployment of our lean tools, which together helped the team focus on our highest value opportunities and drive a wide range of operational improvements in the business.
These changes are structural and sustainable.
And we think there is still additional upside to come.
That said this step change in industrials performance does also reflect a moderate temporary benefits that Rob will define in his section.
In the meantime, a special shout out to our RBS leaders and the entire industrial team for putting this business on what is now a much firmer footing.
I'd also like to say a few words about our commercial segment, where an 80 20 mindset, our digital investment and disciplined execution on gaining traction.
As evident in successive quarters of strong performance.
The top line strength is supported by good end market demand, but also very healthy share gains.
While the segment's adjusted EBITDA margins are now firmly in the mid to high teens.
And still have a path to further upside.
We're particularly optimistic about this segment's growth and margin prospects given its expanding pipeline of differentiated mixed positive new product.
Something we will also discuss in more detail at our Investor day.
Despite our solid margin progress as an enterprise, we did experienced some temporary pressure at climate.
Several factors are at play here, including a variety of ongoing inflationary pressures and a supply chain that has impacted the mix of products, we are able to ship.
This quarter was a headwind.
But also decisions we made to over serve some of our key customers.
Which helped our sales, but also caused us to incur higher costs for items, such as expedited freight and component supplier premiums.
The good news is that these pressures should be temporary the climate team expects its margins to track back towards recent historic levels in the high teens to the low <unk> performance.
We expect by fourth quarter.
Turning to orders.
We saw some moderation as expected with enterprise orders down slightly for the quarter.
However, we remain cautiously optimistic about our top line prospects.
Especially given our strong backlog position.
More than 50% from the beginning of 2021 and 30% year over year.
And the reality that our book Bill rates have been greater than one for the last seven quarters.
Along with commentary from our customers across a range of end markets still largely positive.
In addition for certain of our end markets such as aerospace mining.
And non res construction, there are signs of growing momentum.
Lastly, I'd like to provide a brief update on our integration efforts at Mcs.
Frankly, I could not be more pleased with how the teams are executing.
Cost synergies are tracking ahead of plan and our pipeline of revenue synergies is growing continuing to grow.
Regarding the Arrowhead acquisition, our primary focus has been revenue growth and based on our current backlog and sales forecast. We are on track with the low double digit growth expectation, we had for this business in 2022.
More broadly as you know one of our top strategic growth initiatives for the new Regal Rexnord is selling industrial powertrain solutions, which combine our motors with a range of critical power transmission components that connect the motor to whatever it is powering.
These are by their nature are longer cycle sales, but our pipeline of opportunities is growing nicely and we have also continued to see some early wins.
One in particular is presented on slide six.
Pictured on this slide is the Regal rexnord powertrain solution that we recently sold to automation OEM.
The objective was to make certain production lines in the customer's facility safer and more efficient both from an energy consumption and maintenance perspective.
In response, we leveraged an internal team with engineering and application experience relevant to this customer's specific industry to develop a solution that address their needs.
What the team designed pictured here, we're all Regal rexnord products, including a marathon motor a rex coupling and gearbox and one of our stern breaks.
The solution is powering of rexnord hybrid mat top chain riding on Rex bearings.
The solution has been optimized to handle high loads and frequent weight variation, which are critical performance attributes for this customer.
In addition, the customer's facility is highly optimized from a lean manufacturing perspective, and it was critical that our solution when introduced into the manufacturing environment contributed to further efficiency and performance gains.
In this case the team delivered on all fronts. Our solution has reduced the customer's lined operating cost by about 13%.
While also enhancing plant safety and productivity.
This is a great example of how real rexnord can leverage its differentiated domain knowledge and application engineering expertise to create optimized solutions for customers with demanding operating environment.
This is just one example of the kinds of things currently in our pipeline.
I look forward to sharing many more examples of how we're creating win win opportunities for us and our customers by creating truly value added powertrains.
In summary.
The Regal Rexnord team is continuing to deliver very strong performance and I remain confident that we still have ample opportunities ahead of us to keep improving.
Rob will elaborate on this.
But we are moderately increasing our guidance midpoint.
Balancing high confidence in our team's controllable execution with the many uncertainties characterizing the current operating environment.
And with that I'll turn the call over to Rob to take you through our second quarter performance in more detail.
Thanks, Louis and good morning, everyone. I'd also like to send my thanks to our global team for continuing to execute with discipline in what remains a very challenging environment. So now, let's turn to our second quarter segment financial performance.
Starting with our motion control solutions segment, our Mcs organic sales in the second quarter were up six 4% from the prior year.
The results reflect broad based growth, but with particular strength in the general industrial Marine.
And metals and mining end markets, partially offset by lapping prior year large project activity in alternative energy.
As in recent quarters supply chain disruptions continue to impact our ability to deliver resulting in increased backlog and posing a headwind to the topline a dynamic that continues to impact all of our segments.
Adjusted EBITDA margin in the quarter for Mcs was 26, 4% down 70 basis points compared to the prior year factoring updated corporate cost allocations higher freight costs commodity inflation, FX headwinds and mix largely offset by tailwind related to favorable price realization.
Synergies restructuring actions and higher volumes.
As expected the segment posted a nice sequential improvement in margin and we see this trend continuing in each of the remaining quarters of 2022 living driven in large part by accruing synergies.
Orders in Mcf for the quarter were down approximately 3%. However book to Bill in the second quarter was slightly above one point out.
Yes.
Turning to climate solutions organic sales in the second quarter were up 14, 8% from the prior year.
The increase was driven by strength in North America residential HVAC in North America General industrial markets by positive price realization and by continued share gains in the quarter.
The adjusted EBITDA margin in the quarter for climate was 17, 1% down 390 basis points versus the prior year period.
Factors impacting this margin include commodity inflation higher freight costs supply chain related friction and weaker mix, partially offset by strong price realization.
As Louis mentioned earlier, the climate segment made some intentional proactive decisions to over serve certain high value customers, which resulted in higher freight and component costs.
Finally.
While not a material impact in the quarter. There was a fire at one of our key suppliers of electronic components that occurred during the second quarter that further disrupted our access to components.
While we have found alternative supply this will have a moderate impact to the climate segments results through most of the third quarter.
All that said, we do see this as temporary and while we still expect to see some continuation of this margin pressure into the third quarter, we fully expect to return to more normal margins for this segment in the high teens or low 20% as we transition to the fourth quarter.
Orders in climate for the second quarter were down approximately 5% on a daily basis. However book to Bill in the second quarter was one point out.
Turning to commercial systems.
Organic sales in the second quarter were up 14, 6% from the prior quarter prior year.
Growth in the quarter reflects strong performance in North America General industrial pool pump in large commercial HVAC.
Our commercial business also continues to achieve meaningful share gains tied to digital investments.
The adjusted EBITDA margin in the second quarter for commercial systems was 16, 5% up 70 basis points compared to the prior year, reflecting favorable price realization, partially offset by commodity freight and other non material inflation and product mix and costs associated with supply chain disruptions.
<unk>.
Shifting to orders segment orders for the second quarter were down 6% our book to Bill in the second quarter was close to one point out.
And industrial systems organic sales in the second quarter were up nine 4% versus the prior year principal.
Principal drivers include strength and outgrowth in Americas General industrial markets.
The adjusted EBITDA margin in the quarter for industrial was 16, 2% an increase of 830 basis points versus the prior year period.
We are extremely pleased with the performance at industrial and after two quarters of significantly improved performance.
This business has turned the corner and is on a sustainable path to stronger performance as Louis mentioned the team's persistent adherence to 80 20 principles and their continued deployment of lean tools have had a meaningful positive impact.
That said some of the business performance in the quarter does relate to temporary benefits associated with our annual cost roll, which are also likely to benefit the third quarter, and then to a lesser extent the fourth quarter.
These benefits aside we believe the underlying operational performance of this business in 2022 is consistent with a low teens adjusted EBITDA margin and we do expect further upside to those levels as improvements we are making to the business continues to gain momentum.
Orders in industrial for the quarter were up approximately 14% and book to Bill in the second quarter was one two.
On the following slide.
We highlight some key financial metrics for your review.
Couple notable highlights first on the right side of this page you'll see we ended the quarter with a net debt to EBITDA ratio of one five times or one four times on a pro forma basis.
Our free cash flow in the quarter was 91 6 million.
Which equates to a conversion rate of roughly 65%, while we are tracking a bit behind historical cash conversion levels as we close out the first half of the year due to both the supply chain challenges and some intentional investments we made to better serve our customers. We continue to expect free cash.
Hello conversion of over 100% for the year.
We expect much of this improvement to come through inventory reductions in the third and fourth quarters.
Finally, we spent $70 million on purchasing our shares in the second quarter, bringing our total spend on share purchases to roughly $184 million due.
Through the first half of this year and now have $250 million remaining on our share purchase authorization.
Moving to the outlook.
We are raising our expectation for adjusted earnings per share to a range of $10 20 to $10 80.
From our prior range of $10 10 to $10 70.
Modestly higher range, primarily reflects the impact of our strong second quarter performance, along with our stock purchase activity and addiction. In addition, we are raising our expectation for organic revenue growth to high single digit from our prior range of mid to high.
To be clear our.
Our underlying confidence in the outlook remains high owing to the team's strong operation execution and the sizable tailwind we're seeing from synergies among other factors.
Despite this confidence we felt it was prudent to maintain the breath of the guidance range to reflect a rising global macro risks, but assuming business conditions in the back half do not change materially from what we are seeing today, we would expect to come in a bit above the midpoint of our revised guidance range.
I'll wrap up this call by saying that on the whole. We are very pleased with the Q2 results and our team's ability to execute in an extremely challenging environment. We are meeting all of our expectations with Mcs and ASP EU and while the macro outlook has certainly become less certain.
Our outlook remains very positive considering the tremendous amount of self help we have in front of us on the growth margin and cash flow fronts.
And with that operator, we are now ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Mike Halloran from Baird. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
Firstly and Rob could you clarify your industrial margin comments it sounds like basically maybe a little more detail on why they're elevated here.
If I have it right sequentially, a little lower from where we are <unk>, probably even a little lower than for Q, but what you're trying to say is the margin trajectory into next year, we should be thinking about a low teens kind of EBITDA base is what we build off of that.
The right messaging.
Okay.
Yes, that's exactly the way to think about it.
Did get a bit of a benefit that's a little longer trending for the industrial segment versus other segments and so we'll see that benefit continue through the third and then really taper off in the fourth so the way you sized it up is exactly the way you should we will see that come down a bit in the third quarter and then down to that.
Low teens level in the fourth and Thats kind of the go forward expectation of course, we plan to continue to to work on the underlying performance of the business and have great plans in place to improve upon that but that should be from a modeling standpoint, where were you.
Dart.
Great. Thanks for that Robin and then maybe you guys could talk a little about the channel inventory as you see it across the segments and then.
Correlated how.
Backlog tracking or have you been able to work that down at all as we sit here or is there still some billable caplin sequentially.
Yeah, Hey, Mike. This is Louis let me, let me try to cover both of those all take backlog first backlog did not come down in Q2 and as I commented our book to Bill has been positive for seven quarters and so.
That gives us some.
Confidence in the strength of our growth in revenue, especially going into the second half even in light of the.
The macro uncertainties.
Specific to <unk>.
Channel.
Inventory.
We're still seeing opportunities for restock in industrial distribution, there seems to still be strength there no question.
Have direct visibility to our distributors.
Sell through and there's definite strength.
In resi HVAC AC this is more of a question.
Our supply constraints.
Especially driven by the electronics supply chain challenges that we have seen and bluntly got a little bit worse in Q2 because of the fire at one of our suppliers and so there is definitely restock opportunity there.
No.
Those are the main two I would comment on and say, we still have restocking that will go on through the end of this year.
Thanks, Louis Thanks, Rob appreciate it.
Sure. Thanks, Mike.
The next question comes from Jeff Hammond of Keybanc. Please go ahead.
Yes.
Hey, good morning, guys.
Good morning, Josh Greg Great color and progress on industrial that's good to hear my question is on commercial because you've seen similarly upbeat about that and just kind of maybe level set us on kind of how you think margins are trending there and what you think entitlement is for the commercial margins.
Sure Jeff This is Rob let me, let me first give you the.
First part of that which is kind of the margin trending if you will.
So we would expect coming out so great performance on the margin side coming out of the second quarter in commercial we would expect to see that same level.
Margin performance for the commercial segment in both the third and the fourth quarters.
And so we will.
Expect that.
Them to end about mid teens as you for.
For the year, but that kind of continue about the same trend that you saw in the second quarter.
Hey, Jeff.
I'll add on.
Commercial I've been saying for a number of quarters commercial is our diamond in the Roth and I think we're proving that out and they're doing a fantastic job clearly an 80 20 mindset driving digital customer experience to grow share and I am really really excited.
About the product and technology Roadmaps that we're going to be emphasizing at our Investor day on September <unk>. This is a segment that was I would say has been undervalued historically.
Yet I think there's so much opportunity and we're proving it out with the results. So far this year. So thanks for that question.
Okay and then just on Mcs can you just talk about how youre thinking about sequential margin progression, given what sounds like synergies kind of.
Running ahead thanks.
Sure Jeff.
For Mcs, we would expect that margins continue to improve.
Sequentially so from.
Jumping off of the Q2 endpoint, we would expect to see margin improvement in Q3, and then once again in Q4 again as you stated mostly due to the strong execution by the team, but then.
Synergies really kicking in getting back to that $70 million exit rate, we discussed as we.
First announced the business.
Jackson.
Okay, great I'll get back in queue.
Thanks, Thanks, Jeff.
Our next question comes from Joe Ritchie of Goldman Sachs. Please go ahead.
Thanks, Good morning, everyone.
Good morning.
Yes. Thank you.
I kind of want to parse out there.
Margin bridge for industrial a little bit better.
So.
Look at it.
Let's assume that you would have had kind of like low teens EBITDA margin right.
If not for kind of like the <unk>.
Called out on the on the cost roll impact. So I don't know if maybe that impacts like four to 5 million Bucks.
You've got a little bit more volume leverage DNA was a little bit lower.
You also have like operational improvement that came through so.
Is that the kind of right framework first of all as I kind of think about the bridge year over year and then secondly.
Maybe talk a little bit about the structural.
Cost improvements that youre, making in the business.
Sure. So first of all on the framework that you laid out.
Yes that is the way to think about think about it was about $5 million of costs for all benefit that would take you down to kind of that that low teens, which.
We say its more of the run rate if you will operationally for this business as.
As we move through the remainder of the year now don't forget we're going to continue to get some of that costs will benefit in the third quarter. So we would expect that we would see the elevated margins in the third quarter, and then taper down to that low teens by the time, we get to the fourth.
And then let me add on Joe specific to the performance improvement and I would say, it's absolutely structural and it's a great example of what the Regal Rexnord business system is driving at Regal and we haven't talked a lot about this but it first starts with having the right.
Disciplined talent driving discipline planning and thought that didn't drive disciplined action bluntly.
We have made significant changes in the leadership of this organization over the last two years and they are driving with 80 20, focusing on our quad one customers and products to over serve and then we've done significant actions to improve the operational performance as you.
No. This was the business that was most impacted by the China tariffs, we had to stand up operational capabilities in Mexico. This was also.
Where regal rexnord is highly differentiated because of our global manufacturing footprint. This was the business that was really still very China centric. So we stood up a facility in Mexico that facility is being leaned out.
And we're driving our tool sets.
<unk> improved performance and there is still more room to improve and so.
Ill and again with emphasizing this is a great example of the Regal Rexnord business system at work and I couldnt be more proud of our RBS leadership in the industrial systems team.
Yes.
That's all for me here was like.
And I know that you.
You also had a had a retirement announcements in the climate business.
I'm just curious like that.
Matt this.
This has been pressured a little bit you expect it to kind of come right back in the fourth quarter, maybe just talk a little bit about you mentioned the fire like the obviously out of your control how much of that pressure.
You've seen so far has been exogenous versus maybe things internally that you think you could've done a little bit better.
Yeah, you know I'd say the majority of it was external.
When you when you think of what we were trying to do.
We saw some significant impacts on spot buys in the quarter.
Covid shutdown, our climate plant in China for six weeks and so we had to transfer some production to Mexico, but not.
As efficient and so therefore cost headwinds there as well and then.
The supplier fire, which both hurt on mix, but also on expedited freight and so it was it was it was a tougher quarter.
But we opted.
To over serve our customers and so we took on some cost to be able to support their needs I think that conscious decision in the end is strengthening our relationship with our customers and the good news is that we.
We've been able to course correct.
We are getting some early receptivity on incremental price from our Oems.
And we expect to be in a stronger position by the end of the year and really have a very good plan to get there. So.
I would say again back to the.
The question.
It was a tough externally impacted quarter for the climate business.
They are turning it around quickly.
That's great. Thank you.
Sure.
Our next question comes from Julian Mitchell of Barclays. Please go ahead.
Julian is very muted.
Okay.
We can go to the next question operator and circle back. Thank you.
Yeah.
Our next question is from Nigel Coe of Wolfe Research.
Please go ahead good morning, everyone.
Yes.
Julien speechless.
So.
On this cost roll benefit for industrial obviously very bullish commentary on the on the run rate margins is it the same impact that we had in commercial last quarter and I'm. Just wondering if you could give us a quick sort of Idiot's guide the costs real accounting 101.
Rob if you can get a chance, but just wanted to confirm that that's the that's the same impact.
Yes. It is the same impact and impacts all of our businesses.
Or you're marking up your inventory and you get the benefit of that flowing through your P&L essentially in <unk>.
Gary until you have your prices get back to where they should be to cover off of an inflation and it depends.
The time in which it takes too.
On a.
Run through that impact is dependent upon how fast your inventories turn and so with the industrial segment different from or others. The inventory turns slower and therefore that impact is more delayed or <unk>.
Last longer through the year, that's why it goes through the third quarter in a bit into the fourth before it finally burns off so thats the way the cost roll works, but bye bye.
The end of the year, it's all burned off in industrial and as we said we would expect our margins to reflect that as we exit the year in the fourth quarter at in the low teens.
Understood and then on the climate side.
Mentioned the.
Supply issue with the fire.
Thats correct I think that impact I think that filed was at the end of March about what's taken so that was an impact to dealing with for the whole quarter is that correct.
Yes, it was actually early.
Early second quarter.
So yes that was an impact that we felt all quarter.
Okay. That's great and then just my final question is really around this change can you just remind us that you know as we step up from 14 to 15, how does that impact Regal specifically in terms of the kinds of motors and power systems, you're supplying to the Oems.
There is no question that there is the requirement to drive to more energy efficient solution and so therefore, we'll continue the mix benefit.
Moving from induction motors as you well know we've been moving away from to more of our higher technology barrier variable speed motors, which make up more than 50% of our mix. Today. In addition to that we launched earlier this year.
Our frontier product solution, which is a solution that helps with compressor controls.
That is a product expansion and so this goes back to <unk>.
The new Regal Rexnord very focused on singles and doubles of expanding our served markets with new products and this new product is an intelligent drive that helps to solve the higher seer levels.
We've already signed on with one large OEM and are in talks with others.
Which will benefit us as well going into 2023.
Quantifying that.
Not ready to do yet, but what I can tell you is that the year 2023 will definitely be a benefit for us and Youll hear more about this from us at Investor Day.
Great. Thanks Louis.
Sure. Thank you.
Our next question is from Walter Liptak of Seaport. Please go ahead.
Hi, Thanks, Good morning, Hey, good morning.
Wanted to ask two.
<unk> you called out the macro.
Clearly things are showing some signs of slowing.
I want to understand is if you saw anything in sort of the cadence of orders during the quarter into July or anything there would be a tell about any macro slowing in your business cancelled orders et cetera.
Yes, no nothing at this point that's material.
Specific order perspective, no question from a year over year perspective orders were slightly down.
Book Bill rates slightly down in second quarter from first quarter, but still more greater than one.
Overall, we're still seeing pretty healthy demand, but but no question.
It's understandable of everything we read in the papers every day that there is increased caution and.
And so by the way that's part of the reason why we guided the way we did.
As increased caution for the second half.
Okay sounds good are there are there benefits that we can think of.
For the second half or into 2023 and I'm thinking of.
Some of the copper prices industrial metals prices have been coming down is that can that help at all with the price cost.
Yes, well you know 20% of the Companys on material price formulas, and so that will map pretty closely there's usually a three to four months offset that should bring a little bit of a benefit.
19 quarters in now of price cost positive or neutral positive certainly for the last many quarters.
Regal has a history of being able to hold price now, we'll manage that and talk to customers one by one as we see.
Come on.
Deflation, but.
Our intent because there is lots of other inflation were dealing with including labor, including freight et cetera is that we're going to drive to hold our price in the marketplace.
Okay that sounds great.
And maybe just the last one for me on the industrial yes, it looks absolutely great to see those margins move up.
We can tell you the enthusiasm that you now have.
<unk>.
The renewed enthusiasm for this business.
As they gain momentum.
Could there be another step up that we see going into 2023.
Yes.
How I would think about this is we're continuing to perform and drive to 80, 20, and lean which is a regal rexnord business system and pretty much every quarter, we've had a little bit better a little bit better a little bit better and I bluntly expect that into 2023.
Add to that this tends to be a longer cycle market and as Rob accommodated our book Bill was one two in.
In the quarter and.
There will be leverage with that strength of volume two so yes.
I believe start with that baseline of low team and then keep building from there.
Okay sounds great. Thank you.
Sure.
The next question today comes from Chris Dankert of loop capital.
Please go ahead, hey, good morning.
Good morning, Thank you for taking the question.
Yes, I guess kind of to circle back to that impressive book to Bill at industrial is that just the underlying strength in the market or is there significant cross selling pull through with the <unk> you seem to allude to with the contract win that was highlighted earlier in the presentation and if so is there a way to kind of quantify that cross selling benefit.
Yes, it's a great question. So there's definitely cross selling benefit that industrial business is really a three to five horsepower or greater and that fits on the industrial powertrain, we said that cross selling and the industrial powertrain would bring us a minimum of 10 million.
This year in revenue and so a certain percentage of that will come from industrial lesser from commercial.
Yeah, absolutely a benefit but I would say, what's the real driver of those that growth.
Two.
Service improvement.
Regaining some share that we lost when we transferred production to Mexico, two years ago, and secondly, we've got a really nice business in the datacenter market there both with.
Our generator business, but also our apparel line switch gear and automatic transfer switch business and we are absolutely seeing solid growth in data center and Thats a secular market, we want to continue to grow and so yeah really really overall pretty pleased with industrial systems, and we will continue to drive performed.
Sir.
That's very helpful color Lewis Thank you.
And then just any update on arrowhead or maybe automation market trends more broadly and how those are benefiting regal here.
Yes.
We're really pleased with Arrowhead and we call that business now automation solutions business unit is part of Mcs.
We we definitely.
Acquired that business because of its position in food and beverage we wanted to drive growth with that business I commented in my prepared remarks that we are on.
The path to hit double digit growth in 2022, so feel really good about that and in addition, we are building out our product and technology roadmap, there and feel like there's lots of opportunity to increase our served market.
Which of course, we will be talking about at Investor Day, and then also talking about the sales synergies of being part of a much larger organization like Mcs. So overall feeling feeling good now the food and beverage market again, a good secular market that we feel will continue.
Long term growth.
Certainly a big piece of Arrowhead as well as in the global beverage can market with the <unk> and <unk>.
And.
When you when you look globally pretty much every region is under a capacity constraint with cans and so that is.
Part of the thesis of Arrowhead that was going to drive growth. So you know feeling solid it's only 4% of Mcs, but it's an important and 4% of Mcs and it's part of our Regal restructuring our portfolio and moving more to growth.
Yes, well. Thank you so much for that color doesn't looking forward to September here.
Yeah, great. Thank you.
Our next question is from Julian Mitchell of Barclays. Please go ahead.
Hi, Thanks, good morning.
Good morning, Julien good morning.
Just want to.
Lewisville, Rob to kind of circle back to the old us Colourants social casino bookings as you said they were down.
Down modestly in Q2.
We have raised though the organic sales guide for the year.
And so feeling pretty good about the second half on the sales does that tell us that sort of your bookings growth year on year in the second half it shouldnt be much worse than what you just saw in Q2 and I don't know if there's any color you could give on July trends in particular around bookings right.
Yes, Julian happy to.
Give a little bit more color here, so I think youre spot on.
On the way to think about the second half.
In particular as compared to Q2.
Relatively flat.
On the orders relatively flat.
But we have a very big backlog and we're working through that backlog and so therefore with the strong execution now that Q2.
And continued solid price attainment.
In our segments, we felt comfortable with increasing.
The guidance by <unk> 10.
And as both Rob and I said in our.
Our prepared comments.
If everything stays the same and supply chain.
Perhaps there might be a little bit of a beat to that midpoint, but right now we're going be cautiously.
Conservative and go in with the guidance we've given.
Thank you and then just.
Looking at the second half.
I know you don't guide quarterly but is the right way to sort of think about it you've got roughly 21% EBITDA margins dialed in for the year as a whole.
It's a similar sort of 21% number for both Q3 and Q4 and then you just have that usual sort of seasonal revenue step down a little bit in Q3, a little bit more in Q4 is that the right way to think about the sort of Q3 Q4 earnings and any other items you'd call out for.
The back half.
Yes, Julian this is Rob the way I'd think about it is like you said on the top line certainly you get a bit of seasonality as you go from three to four on the on the margin profile, absolutely we should see.
And that 21, 21% plus range as we go through the third quarter and then maybe in a bit of improvement as we enter the fourth because that's when we'll realize more of those synergies that we have good line of sight too and that will come through the Mcs segment. So very good cadence Q3 to Q.
For for Mcs as expected, which will drive a lot of that EBITDA margin performance as we exit the year.
That's very helpful. Thank you.
Got it.
Yes.
Again, if you have a question. Please press Star then one.
Our next question comes from Jeff Hammond of Keybanc. Please go ahead.
Hey, guys just a quick follow up on free cash flow I think you said, 100% conversion you're running a little bit behind just just wondering how long of a part that is to kind of get to that conversion that's pretty impressive in this in this environment.
Yes.
Yes, it is a bit of a long time, but the good news is is that we've got pretty good indication right now as we evaluate our inventories and have worked through.
The modeling in terms of how that inventory should become a source of cash in.
In the back half of the year for us to get us to that 100% plus and so feel really good about the modeling at this point given everything that we see it as today. So it will likely mostly come from inventory reduction just to be clear and most of that will come late Q3 and then.
Into Q4.
And Jeff I'll just add on from.
From an operational perspective, hopefully, we're gaining some credibility about being a plan do check Act company and we have plans and we're executing on them every one of our businesses.
Certainly customer service servicing our customer is a priority.
We are driving those plans on inventory and feel like.
We have a clear path to like Rob said achieved the free cash flow goal in 'twenty two.
That's great. Thanks, guys.
Got it great. Thanks.
Thanks, Jeff.
This concludes our question and answer session I would now like to turn the conference over to CEO Lewis Lewis Pinkham for final comments.
Thank you operator.
And thanks to our investors and analysts for joining us today.
Rest assured that our high performing Regal rexnord team is acting with discipline and urgency and in accordance with our Regal rexnord values to bring value to our customers and deliver on our financial commitments.
More broadly we will continue to execute on the many opportunities before us new product development.
Digital.
RBS, AED 20, making lean pervasive sizable M&A synergies and a tremendous opportunity tied to capital deployment to name just a few.
These keep me confident that the best days for Regal Rexnord remained firmly ahead of us.
And I look forward to sharing this vision of what lies ahead in greater detail at our September 13th Investor Day at the New York Stock Exchange.
I hope to see many of you there.
Thank you again for joining us today and thank you for your interest in Regal Rexnord.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.